The Great Recession of 2008-09 left the U.S. economy in tatters. Consumers, the driving force of the world's biggest economy for more than two decades, sharply reduced spending in the face of plummeting house prices, soaring debt and near double-digit unemployment. Embattled banks stopped lending, which suited the majority of businesses and individuals, who stopped borrowing. When the economy did resume growing, it was feeble at best.
Much of the blame for this sorry state fell on Washington, where tax-hating Republicans could not or would not work with Democrats to craft effective policies. The Obama administration's initial responses were timid and its subsequent embrace of deficit reduction – rather than focusing on job recovery – was neither sensible economics nor smart politics.
As the weak recovery sputtered and stalled in 2011, President Obama looked increasingly out of step with most Americans. While they fretted about job losses, underwater mortgages and falling real incomes, he kept foolishly looking for enough budget cuts to appease his die-hard opponents, who were in thrall to the who-needs-government Tea Party crowd.
How this all came about is the subject of Noam Scheiber's The Escape Artists, a revealing look behind the curtain at the key players responsible for steering administration economic policy during the crisis – and how they managed to drive right off the road, with no small assistance from a naive, determinedly bipartisan and surprisingly conservative President.
The trouble started even before Obama moved into the White House. As the financial markets froze over and the world plunged into the worst slump since the Depression, it was plain that governments and central banks around the world had to open the spending taps to shore up rapidly deteriorating economies.
Based on her calculations, rookie economic adviser Christina Romer urged massive stimulus spending of as much as $1.8-trillion (U.S.). But the only woman on the senior economic team was overruled by more experienced Washington hands, who eventually settled on a more politically palatable figure of $800-billion.
Those who put political expediency above economic priorities included Treasury Secretary Timothy Geithner, a career public official, and celebrated economist Larry Summers, a former Harvard president and treasury secretary who usually regarded himself as the smartest person in the room. Both gained their insider credentials with the Clinton administration, where they were best known for putting out international financial market fires and for championing balanced budgets and financial deregulation at home. This background would come into play when the administration turned its attention to the expanding deficit and to badly needed financial reforms, typically watered down or jettisoned even before reaching a hostile legislature.
The end result was a dissonant group of advisers who failed to provide President Obama with the ammunition he needed at a time when Republican opponents were railing against further government intervention and insisting, against all economic logic, that reduced public spending (and lower taxes) would restore confidence and enable the economy to repair itself. Obama himself, more cautious and fiscally conservative than he is often portrayed, leaned instinctively toward deficit reduction.
By 2009, when the austerity versus more stimulus debate was raging in capitals throughout the industrial world, Scheiber notes, Obama needed a perfectly functioning group of economic advisers capable of coming up with a strategy that would pour money into the faltering economy yet still appease the deficit hawks through long-term cutbacks. "The President, alas, did not have such a team."
Scheiber watched all this unfold while covering the White House for The New Republic magazine, where he is a senior editor. Armed with a masters in economics from Oxford University, he brings a firm grasp of the fiscal and financial policy issues to his task. And it's on display in The Escape Artists in always readable, occasionally inspired and mercifully jargon-free prose.
It's also a more evenhanded and deliberate analysis of the political and economic games afoot and of the key egos on the field of play than the dark picture of venality and Wall Street manipulation painted last fall by journalist Ron Suskind in Confidence Men, which covers much the same ground.
In Scheiber's telling, the Treasury secretary was indeed a Wall Street ally and their main voice in the halls of power,. But his primary interest was safeguarding the financial system, whose health was vital for the economic recovery. His tendency "to see the world through the eyes of large financial institutions" was "forgivable during a crisis," Scheiber writes. The problem was that Geithner always seemed to see the world that way.
As for Summers, Scheiber observes that he "was not someone with a flair for the long game – for the week-in, week-out slog of bringing colleagues around to his views." Indeed, his best contribution may well have been his resignation as influential head of the National Economic Council at the end of 2010.
The Escape Artists produces no startling revelations. But it is a superb account of how some extremely smart, well-intentioned people could end up making the executive branch appear as indecisive and dysfunctional as Congress in the midst of a character-testing crisis that has come to define Obama's presidency so far as one of opportunities lost.
Brian Milner writes about economics and global markets for Report on Business